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Is your equity fund manager beating the benchmark?

According to the latest SPIVA results, probably not.

After a long period of weak performance, 2017 was a good year for the JSE. The S&P South Africa Domestic Shareholder Weighted (DSW) Index was up 22.6%.

The vast majority of investors in local equity funds did not, however, see this level of return. According to the latest S&P Indices Versus Active (SPIVA) scorecard, only 4.08% of South African funds beat this benchmark. That is only marginally more than one in every 25 funds.

It must however be acknowledged that a huge part of the market’s performance was driven by Naspers. The media giant was up 71.8% last year, and given that it makes up around 23% of the index, this had a massive impact.

Most fund managers would not carry this level of exposure to a single stock, simply because it is too risky. An index with this level of concentration is therefore not the best way to measure relative performance.

S&P Dow Jones therefore also provides a comparison with the S&P South Africa DSW Capped Index, which limits the weight of any single stock to 10% in the index. This is a more realistic benchmark, but still one that active managers struggled to beat.

As the table below indicates, only between one quarter and one fifth of funds outperformed this benchmark over the one-, three- and five-year periods ending December 31 2017.

Percentage of South African funds outperformed by benchmarks
Category Comparison index One year Three years Five years
SA Equity S&P South Africa DSW Index 95.92 92.67 93.23
S&P South Africa DSW Capped Index 74.49 77.64 78.59

Source: S&P Dow Jones

What is particularly significant is that to the end of June 2017, 44.95% of funds had outperformed the S&P South Africa DSW Index over 12 months. The latest figures therefore show a huge turnaround in fortunes in the second half of the year.

“The large increase in funds underperforming the benchmark since the mid-year SPIVA Scorecard may indicate that active fund managers were not positioned well to take advantage of the unexpected mid-year rate cut and political landscape,” S&P Dow Jones noted.

It’s also notable that, the average performance of South African equity funds is well below this benchmark. This remains true even if one uses an asset-weighted average, which is a better indication of the return most investors receive as larger funds are given a higher weighting.

Average South African fund performance
Category One year Three years Five years
S&P South Africa DSW Index 22.61% 9.89% 13.23%
S&P South Africa DSW Capped Index 15.64% 7.65% 11.79%
South African Equity (equal weighted) 12.07% 5.74% 9.52%
South African Equity (asset weighted) 13.74% 7.00% 10.69%

Source: S&P Dow Jones

Local bond fund managers did however continue to demonstrate their ability to beat the benchmark. As the below table shows, both short-term and variable-term funds fared significantly better than the benchmark over almost all time periods.

Percentage of South African funds outperformed by benchmarks
Category Comparison index One year Three years Five years
Short-term bond STeFI Composite 14.29 13.33 22.73
Diversified/Aggregate bond S&P South Africa Sovereign Bond 1+ Year Index 65.98 22.35 24.19

Source: S&P Dow Jones

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COMMENTS   28

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Why would anyone still choose and expensive active manager???

Perhaps a suggestion to otherwise in your comment?

Use low cost tracking funds… Much better than trying to guess what fund manager will outperform, and none of them outperform consistently in any case. All the research show that over time you are better of in a low cost fund.

Active managers are necessary counterparts to passive investors – if there were no active managers then markets would not be efficient and passive investing would not work.

This is a problem when 99% of Active Funds shut down. And active fund managers are not the only traders and price discovery in the market.

100% agree Gemini. Cancelled all my investments with sanlam, psg and li ert 6 years ago after 15 years of pathetic returns. Local and internationally I only use etfs. Have never looked backed. Absolutely thrilled with the results. Wish my eyes were opened when I was 18 years old, instead of being swindled by the investment industry.

To those that understand the spectrum of options, the choice appears simple. Unfortunately a large number of savers / investors are not aware of or don’t understand the options, so they go with what they have ‘available to them’.

No (or very few) fund managers actually benchmark their performance against the S&P Indices. Would be more informative to produce this analysis on commonly used benchmarks.

These indices are similar to SWIX. It’s just S&P’s versions of it. Do your homework and google it before you underperform it as well.

Something odd here. More equity managers (96% of them) underperformed the lower return benchmark (DSW capped at 15.64% return) over one year than the higher return benchmark (74% of managers underperformed 22.61% return). It’s like saying in a high jump more jumpers cleared the higher hurdle than the lower one. Or am I missing something Patrick?

Sorry, the labels were incorrect. It’s been corrected. Well spotted.

Here’s the flaw with this analysis. In every single industry (and not just asset management) if you take the ‘after costs’ performance/value-add and compare it to a ‘before costs’ benchmark the average will be below the benchmark. That is definitional. So why do we do this for asset management and funds only? Even according to John Bogle this is flawed. The better (and more realistic comparison) is the average manager versus the average index fund. You invest in a fund in order to get the index return. The index fund represents the reality of index investing. Over the past 25 years the average ALSI index fund has underperformed the LSI by about 2% per annum. Passive investing is also prone to error and by promoting the index in the fashion that SPIVA does is misleading and must be questioned.

Nobody said passive investing is flawless. And of course after fees you will trail the benchmark but at least I’n not paying a ridiculous fee for hoping the active manager can outperform (not even talking about the performance fees they charge if they actually outperform!) and the ever shifting benchmark. I’m very happy with all my passive investments (local and offshore) – Offshore you can track indexes from 0,16% (all costs included) – Then I still get a dividend yield of about 2% in US$ without the greedy asset manager taking the dividends because there is no management fee!But if you are happy to pay for the Ferrari (one for the broker and one for the asset manager) please be my guest.

What is going to be interesting is whether our benchmark is really diversified. It’s becoming a case of can your portfolio outperform Naspers? If Naspers hits a wobbly, then I reckon that quite a few funds will outperform the Benchmark. Of course, it won’t be >50%, but at least a higher amount than most years. I think the majority of active managers are benchmark huggers anyway.

Darts and blindfolds

Your comment smacks of great ignorance. We have a world class asset management industry in this country – a country where very little is world class – that should be praised for the professional and caliber of its participants.

I’ll take the benchmark thank you very much

Go for the benchmark that is fine, just about every investor needs to address this issue. My point is that you cannot invest directly in the benchmark you must invest in an index fund that attempts to match the index return before costs and frictions. After costs and frictions you are virtually guaranteeing yourself underperformance i.e. by using the very argument that is used to criticize active managers you put yourself in the same underperformance bracket. Absolutely nothing wrong with low cost passive but the argument about supporting low cost passive because so few active managers outperform is seriously illogical in my view (when 100% of passive funds underperform).

True colson. ETF=index less costs of .04 to .60%. However, as most active investors dont even achive index benchmark, active = index less underperfomance – broker fee – active manager fee = index less 3-6%. You cant win this argument no matter how you try. The 2 greastest investors Benjamin and Buffet agree. Index investing is the way to grow your wealth….not transfer it to some broker/active manager.

This comment is a response to HS. Again I disagree with. I acknowledge the benefits of low-cost, passive investing (and for what it’s worth I’ve had the privilege of meeting John Bogle and have read all his books) but it is not the only way to succeed with investing. The fact is that above average active managers exist and you will find them in every equity market. It is not an argument of which is better as both approaches have pros and cons. You reference Buffett and Graham but the fact is both practiced active management and both were above average. Look at the latest unit trust results (i.e. the facts) and look at the ALSI tracker fund with the longest track record, namely, Gryphon. Over 20 years the fund produced 13.23% per annum versus the ALSI of 16.02%. The tracker UNDERPERFORMED by 2.79% per annum. That is much more than what you indicated. Indexing can disappoint like any other investment approach. Your preference is passive and that’s great but don’t knock active management with flawed logic and reasoning.

From experience Colson has a point but by a thread

Active managers that really give performance are a rarity

I decided on an international managed fund, Fundsmith (Terry Smith) class T

So far its match Vanguard Uk over its period of inception, despite being on the high expense

For what it is worth I have studied this issue – in various markets – for about 20 years. While active managers that provide ‘alpha’ are few and far between they do exist but it does not end there. Too benefit from a manager’s long-term ‘alpha’ you have to stay with the manager through the inevitable bouts of underperformance along the way. Now the issue flips back to the investor and very few investors have the ability to ‘stay the course’. Fundsmith, has had tremendous returns since inception and as an investor you have probably not experienced those juicy returns but they have caught your attention. Fundsmith WILL (this is guaranteed) go through periods of weak performance. Your ability to sit tight and tolerate the ‘bad times’ will decided whether you reap the long-term outperformance (assuming Terry Smith is a superior manager which it appears to be).

Allan Gray Equity fund annualised return – net of all fees and costs – for almost 20 years is 23% or almost double that of Gryphon over a similar time frame.
Ps Buffett is not a passive investor, so if you want to make money,do what he does rather than what he says.

If the benchmark is 3 % per annum on a 30 year old RA – then Old Mutual (in my spouse’s portfolio) – barely matched it..what a joke they are, methinks!

If it took 30 years to discover that the returns were that poor who is actually the joke? Stop complaining about poor returns and take an active interest in your own money….

If your fun damager was a drunk blindfolded monkey throwing darts at a share listing he or she may have outperformed.

Unfortunately he or she is not.

DIY formula : half in passive low cost ETF especially offshore something like SPY. For the other half, take some responsibility and have some fun and do your own portfolio of only about six champion stocks.

An incredibly insulting and immature comment. You fail to realize that we have a high quality asset management industry in this country. As a matter of interest even your ETF and index tracker has a fund manager (and they can also underperform). You can invest in whatever manner that suits you and you may have the ability to do-it-yourself BUT it won’t be suitable for everyone. Also realize that superior active management exists and inferior passive management also exists. Allan Gray Equity has produced 3 times the value on a lump sum investment made at inception versus the benchmark. Very few investors may have obtained that growth but it is not Allan Gray’s fault that many investors make mistakes and are poorly advised in some cases.

the comment was not intended as praise!

please go and look at SPY fees in comparison to what our overrated overpaid glorious industry charges.

An investor can sit with half in SPY paying 0.09% fees and pay brokerage fees on ten trades a year in a concentrated portfolio.

It amazes me that people who had the skill to build a small fortune in their own businesses fall for the rubbish notion that they cannot manage their own funds – that a manager who has 99/100 times not ever managed an actual business, knows more about the business of business.

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